Day Hagan Market Update, hosted by Donald Hagan, CFA, was recorded on April 24, 2024. Don discusses a variety of financial market-related topics, including the driving forces influencing the global financial markets, the U.S. economy, economic growth vs inflation, Equity Sectors, tax policy, Fed rate cuts, Smart Sector with Catastrophic Stop Update, International markets, Fixed Income, and more.

Late last week, the “Index Movers” were sold and consequently the big cap equity indices recorded a significant decline. Meanwhile, other equity market areas attempted to outperform, showing that there was some price stability under the surface. Proxies for utilities, staples, financials, health care, and DJIA were up for the week. Was that it? Is the selling done/close to being done?

Prior to last week’s decline and as volatility picked up in both directions, domestic equity market indices had generally traded sideways for the better part of the past four to six weeks (hesitation). With last week’s sell-off, however, either uptrend lines were violated and not decisively recaptured and/or previous reaction low support levels were broken.

Wall Street tried to “Break on Through (To the Other Side)”—as The Doors might put it—the often-discussed upward trending support lines. With only one exception, however, it was not to be. At least not yet. From a short-term risk management perspective and considering last Friday’s relatively low-quality rally (NYSE Advancing Issues only equated to 57% of Total NYSE Active Symbols).

Entering April, the strategy continued to favor risk-on leadership but did not rebalance. The model remains overweight, U.S. Treasuries (allocated across short-, intermediate-, and long-duration), High Yield, & Emerging Market Bonds. The portfolio is market weight TIPS & Mortgage-Backed Securities & underweight U.S. Floating Rate Notes, U.S. Investment Grade, and International Investment Grade.

Entering April, the non-U.S. equity Core model overweighted China and Germany. Japan and Canada are neutral. The U.K., France, Switzerland, and Australia are underweight. The Explore model favored Malaysia, the Philippines, Poland, Sweden, and Taiwan.

The sector model recommended mixed leadership this month. Entering April, Financials and Utilities are overweight. Communication Services and Real Estate are underweight. Materials, Energy, Industrials, Information Technology, Consumer Staples, Health Care, and Consumer Discretionary are all market-weight.

The Portfolio continues to invest in companies producing excess returns through positive economic profitability, supported by solid balance sheets (quality), significant cash generation (profitability), & trading with considerable margins of safety (valuation). We believe these factors will continue to provide rational opportunities for the foreseeable future.

Despite the recent rotation (large vs. small, growth vs. non-growth, S&P sectors—those other than Index Movers are having their day in the sun) & the simplicity of it, the support (and resistance) lines we’ve highlighted remain intact (walking the line). When the lines break, we will take notice. Also, the domestic equity market indices haven’t shown any distinct, strong patterns of distribution.

This presentation discusses the current Catastrophic Stop Model, Risk Management, potential signaling, U.S. markets, Equity Markets, International Markets, Emerging Markets, China, Technology, Banks, Seasonality, Sentiment, Trends, Growth vs. Value, and more. Financial advisors are encouraged to watch this presentation replay for a comprehensive understanding of the market trends & indicators.

Join Art Huprich, CMT, on Tuesday, May 21, 2024, at 4:15 PM EST, for the monthly Day Hagan Technical Analysis. Art will be discussing the current technical condition of the equity markets (domestic, international, and emerging) based on supply (selling pressure) and demand (buying interest) analysis.

While the primary “trend” remains supportive (higher), a mostly euphoric sentiment backdrop reflects an aggressive, bullish attitude. As a contrarian indicator, sentiment represents a short-term yellow flag. This comes at a time of historical seasonal weakness for NASDAQ and a period of near-term hesitation for the S&P 500 (Big Cap/Index Movers Complex).

Sir John Templeton once said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” While I am not saying that the S&P 500’s uptrend has run its course, following last Friday’s tape action (more below) I believe Wall Street’s sugar high (a state of hyperactivity caused by excessive consumption) towards a certain segment(s) of the equity market has produced a gut check—a test or assessment of courage, character, or determination.

Entering March, the non-U.S. equity Core model overweighted Japan and Germany. China and Canada are neutral, and the U.K., France, Switzerland, and Australia are underweight. The Explore model favored Mexico, Turkey, Brazil, Spain, and the Philippines.

The allocation of International Investment-Grade bonds remained underweight. Rising inflation expectations are bearish for the sector but offset by rising stock market volatility. Price-based measures—rising relative strength and short-term trend—improved during the month to bullish levels.

The sector model remained with a cyclical bias during the month. Entering March, Information Technology and Financials are overweight. Industrials, Health Care, Consumer Discretionary, Consumer Staples, Energy, and Real Estate are neutral. Materials, Communication Services, and Utilities are underweight.

The best way to describe the tape action last week and since the October 2023 low is “the grind higher continues”. Fortunately, the grind higher has recently been taking on more participants, albeit hesitantly and with much consternation. Also, the number of New 52-Week Lows (a guidepost for when the odds of a meaningful decline increase—reach out for a chart) refuses to expand.

From seasonal and cycle perspectives, February is often one of the weakest months of the year for equity performance. However, that wasn’t the case this time around, with equity markets around the globe continuing higher as investors focused on better-than-expected global economic activity and hopes for easier central bank policies.

While various measures of short-term breadth continue to diverge, the equity market maxim “the trend is your friend” remains true. This is especially evident with the Large Cap “Index Movers.” As Don Hagan penned, “The Catastrophic Stop model is still positive, and we are aligned with the message.

From “Mag 7” to “Lag 7?” Not completely, yet. But the number of technology stocks exhibiting relative outperformance is slowly declining, especially when compared to alternative equity market proxies. Also, while still underperforming the S&P 500 YTD, other sectors—Energy, Health Care, Financial, Consumer Discretionary, and Industrial—are slowly moving up the relative strength scale.